Egypt seeks to end outflow of foreign reserves

The Egyptian government has withdrawn its plans to restrict the financing of imports, local newspapers reported Thursday, November 29. The measures, announced last week, were taken to stave off a deva

The Egyptian government has withdrawn its plans to restrict the financing of imports, local newspapers reported Thursday, November 29. The measures, announced last week, were taken to stave off a devaluation of the currency as well as to end the outflow of foreign exchange reserves, but have come under increased criticism from public and private businesses and unions.

With falling supplies of foreign currency on the official market, the US dollar has reached the maximum legal exchange rate of 4.27 Egyptian pounds this week, giving rise to the re-emergence of a black market. The newly elected Central Bank of Egypt (CBE) Governor Mahmoud Abu Al-Ayoun is now facing his first real challenge on the job.

Authorities have blamed the recent crisis on bank treasurers and foreign exchange dealers—who have been allegedly speculating against the pound—and on excessive demand for foreign currency due to the rise of consumer and even luxury imports.

Last week, the central bank said it had agreed with senior bankers that imports should be financed through letters of credit, which are opened between banks on behalf of clients, rather than documentary collections, which are agreed directly between trading parties. Bankers and businesspersons had described these measures as effectively imposing limited import restrictions through the banks and as stymieing trade in an already sluggish economy, Reuters reported.

Egyptian monetary authorities have also moved to ban dollar transfers abroad for the next three months, according to Al-Watan. Financial experts advised to cease the import of luxury commodities, which constitute 26 percent of all imports to the financially strapped Egypt. Other, less controversial steps taken by the government last week include cutting the government's demand for foreign currency by one billion dollars by postponing state purchases from abroad.

In August the CBE announced a third adjustment to its US dollar-Egyptian pound exchange rate, under the ‘managed peg' system, introduced earlier this year. The pound started to decline more sharply against the dollar following a gradual slide since May 2000, when Egypt abandoned a nine-year currency peg at about EP3.40.

The central rate was initially fixed at EP3.85 to the dollar in late January, but was moved to EP3.86 in May-end and then again to EP3.90 on July 3. In August, the CNE devalued the pound by about six percent, setting the rate at EP4.15 and allowing it to trade in a band of three percent above and below the core rate.

However, this dollar peg is widely perceived as unsustainable, as most estimates put a fair value on the range of 4.00-4.20 Egyptian pound to the dollar. Analysts anticipate the need for a further small devaluation in the near future, with the erosion of Egypt’s foreign exchange earners, first and foremost of which is the tourism sector, hard hit by the September 11 attacks. — (menareport.com)